Takeaway from progressive practices initially small, but can be material over long haul

By Neil Smith

Companies rarely act on new initiatives without first knowing the so-called “business case.” Corporate responsibility must similarly factor in.

The effects of corporate responsibility on profitability—the real bottom line—differ from company to company based on a number of considerations, not the least of which are size, market penetration and reach, and reputation. Another factor is the firm’s approach to corporate responsibility, ranging from very strategic or incremental on certain issues to systemic and cross-functional in scope. Yet, except for small companies whose strategic decisions and financial performance are guided by a clear set of values, chances are the CR business case, especially for large public companies pressured to keep Wall Street analysts happy, is either too small or likely to take too long to have a material effect to compete with more immediate ways of generating revenue or cutting costs, such as buying another company or laying off employees.

Furthermore, there is no clear evidence that corporate responsibility leads to higher stock price. While some studies suggest a positive correlation between responsible business practices and share price, too many economic and market conditions influence share price to isolate, for example, positive environmental or employee initiatives, as a consistent driver of stock performance. A similar argument can be made for product sales.

Despite popular belief, the ROI from progressive and responsible business practices, except for energy conservation measures, is, in fact, initially small.

Corporate responsibility practitioners, who specialize in quantifying the financial effects in various industries, find that even companywide initiatives, such as increased access to healthcare benefits for all employees or waste-elimination process improvements, rarely total more than several hundred thousand dollars to several million dollars in cost savings in the first year.

These kinds of numbers seldom get the attention of senior corporate managers, who are looking for tens of millions of dollars in return from new initiatives. However, for companies that support new initiatives beyond the first few quarters, the cumulative effect of progressive operational practices can return hundreds of millions to the bottom line over time.

DuPont, for example, which has tracked the financial effect of corporate responsibility across functions and business units for many years, reports savings of more than a billion dollars from its environmental and worker safety practices alone. Sun Microsystems, where about 50 percent of its employees work from home or in a flexible office space, has reportedly saved almost $400 million in facility costs during the last six years.

So where is the business case for corporate responsibility? For some senior leaders, a meaningful dialogue with shareholder activists, leading to the withdrawal of a shareholder resolution and the prevention of a contentious annual meeting, can prove more compelling than the most sophisticated financial analysis.

For others, progressive initiatives that cause a sizable drop in overhead costs will catch their attention. Energy conservation technologies, for example, which have been around since the 1970s and long-considered low-hanging fruit, offer the fastest payback, often in a year or two.

Leveraging the knowledge and experience of employees, especially those who have been marginalized, to collaborate in solving costly business issues, can produce an immediate jump in productivity and new ideas.

Although initially more daunting but far more profitable, switching from a compliance-driven business model to initiating process improvements in manufacturing that eliminate the use of toxics or reduce waste, can immediately lower the cost of reporting requirements, insurance, disposal, and local disputes over air pollution, to name a few.

Canada-based oil company Syncrude, for example, initiated a comprehensive employee health and safety program five years ago that reportedly saves the company $150 to $200 million annually in increased efficiencies, reduced turnover and absenteeism because of illnesses or injury, and insurance costs.

The business case for corporate responsibility is also not always what you think it is. U.S. companies have a long-held reputation for being risk-adverse, preferring to react to problems rather than preventing them. Getting senior officials to think beyond “it’s not apt to happen to us” and to recognize that significant risk to shareholder value lies in doing nothing is perhaps the strongest business case for corporate responsibility.

Without a consistently proactive corporate culture, even the most seemingly progressive company risks disastrous consequences.

Ford Motor Co. saw its stock tumble for months following the controversy over tire blowouts on its SUVs in 2000, and only recently settled the last of wrongful death and personal injury lawsuits. Ironically, Ford had issued its first corporate responsibility report just months before the debacle first came to light in the media.

More recently, BP’s polished image as “the oil company with a conscience,” was cut short after the deadly explosion at its Texas City refinery in 2005 and major leaks in one of its Alaska pipelines a year later. After ignoring repeated employee warnings over cutbacks in personnel, training, and routine maintenance at its U.S. operations, BP is forced to spend billions in fines, settlements from civil suits, improvements in all U.S. facilities, and in rebuilding its image.

Neil Smith is managing partner of SmithOBrien, a management consulting firm on corporate responsibility in New York City, and an adjunct faculty member at Boston College’s Carroll School of Management.